Monday, November 16. 2020
SEC Approves Amendments to Harmonize and Improve “Patchwork” Exempt Offering Framework
A fundamental part of the federal regulatory system is the mandate that all securities offerings be registered with the SEC or qualify for an exemption from registration. This can be an important step on the way to an initial public offering, and navigating that path requires maneuvering through the intricate exempt offering framework. The complexity of that framework reflects its progression over time through legislative changes and SEC rules that have resulted in varying conditions and requirements for exemption.
The recently approved modifications mark the beginning of the next phase in the SEC’s efforts to harmonize registration exemptions and preserve investor protections as they will:
- enhance the exempt offering framework to benefit investors, emerging companies, and expert issuers
- benefit from extensive public engagement and follow the SEC’s June 2019 concept release and March 2020 proposing release regarding the harmonization of offering exemptions
- focus on gaps and complications in the exempt offering framework that hinder access to capital for issuers and access to investment opportunities for investors
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
- establish more clearly the ability of issuers to move from one exemption to another in one broadly applicable rule
- raise certain individual investment limits
Integrated Framework
Questions regarding the need to view the offerings as “integrated” for purposes of analyzing compliance may arise when issuers use various private offering exemptions at the same time or within a short time frame. This occurs because many exemptions have different limitations and conditions on their use, such as whether the general solicitation of investors is allowed. There is potential for the integrated offering to fail to meet all the applicable conditions and limitations if exempt offerings with differing requirements are structured separately but analyzed as one “integrated” offering.
The revisions establish a new incorporating framework that provides a general principle that 1) looks to the specific facts and circumstances of two or more offerings, and 2) focuses the analysis on whether the issuer can substantiate that each offering either complies with the registration requirements of the Securities Act or that an exemption from registration is available for the particular offering.
The amendments also provide four non-exclusive safe harbors from integration providing that:
- offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings
- any offering made more than 30 calendar days before the start of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with such other offering(s) provided that in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation. In such a case, the issuer has a reasonable belief, based on the facts and circumstances with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation
- an offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to:
- a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors
- an offering for which general solicitation is permitted that terminated or was completed more than 30 calendar days prior to the commencement of the registered offering
- a terminated or completed offering for which general solicitation is not permitted
- offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering
Offering and Investment Limits
The SEC is amending the current offering and investment limits for certain exemptions.
For Regulation Crowdfunding, the amendments:
- raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million
- extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period
- amend the investment limits for investors in Regulation Crowdfunding offerings by:
- removing investment limits for accredited investors
- using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors
For Regulation A, the amendments:
- raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million
- increase the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million
For “Test-the-Waters” and “Demo Day” Communications, the SEC is amending offering communications rules by:
- allowing an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities
- permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the SEC in a manner similar to current Regulation A
- providing that certain “demo day” communications will not be deemed general solicitation or general advertising
For Rule 504 of Regulation D, the amendments raise the maximum offering amount from $5 million to $10 million.
For Regulation Crowdfunding and Regulation A Eligibility, the amendments will:
- establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers
- impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations
For Improvements to Specific Exemptions, the amendments will:
- change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings
- add a new item to the non-exclusive list of verification methods in Rule 506(c)
- simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings
- harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding
The following table provides an overview of the amendment capital-raising exemptions.
Type of Offering | Offering Limit within 12-month Period | General Solicitation | Issuer Requirements | Investor Requirements | SEC Filing or Disclosure Requirements | Restrictions on Resale | Preemption of State Registration and Qualification |
Section 4(a)(2) | None | No | None | Transactions by an issuer not involving any public offering. See SEC v. Ralston Purina Co. | None | Yes. Restricted securities | No |
Rule 506(b) of Regulation D | None | No | “Bad actor” disqualifications apply | Unlimited accredited investors
Up to 35 sophisticated but non-accredited investors in a 90 day period |
Form D Aligned disclosure requirements for non-accredited investors with Regulation A offerings |
Yes. Restricted securities | Yes |
Rule 506(c) of Regulation D | None | Yes | “Bad actor” disqualifications apply | Unlimited accredited investors
Issuer must take reasonable steps to verify that all purchasers are accredited investors |
Form D | Yes. Restricted securities | Yes |
Regulation A: Tier 1 |
$20 million | Permitted; before qualification, testing-the-waters permitted before and after the offering statement is filed | U.S. or Canadian issuers Excludes blank check companies* registered investment companies, business development companies, issuers of certain securities, certain issuers subject to a Section 12(j) order, and Regulation A and reporting issuers that have not filed certain required reports “Bad actor” disqualifications apply No asset-backed securities | None | Form 1 A, including two years of financial statements
Exit report |
No | Yes |
Regulation A: Tier 2 | $75 million | Same as Regulation A: Tier 1 | Same as Regulation A: Tier 1 | Non-accredited investors are subject to investment limits based on the greater of annual income and net worth, unless securities will be listed on a national securities exchange | Form 1‑A, including two years of audited financial statements
Annual, semi-annual, current, and exit reports |
No | Yes |
Rule 504 of Regulation D | $10 million | Permitted in limited circumstances | Excludes blank check companies, Exchange Act reporting companies, and investment companies
“Bad actor” disqualifications apply |
None | Form D | Yes. Restricted securities except in limited circumstances | No |
Regulation Crowdfunding; Section 4(a)(6) | $5 million | Testing the waters permitted before Form C is filed
Permitted with limits on advertising after Form C is filed
Offering must be conducted on an internet platform through a registered intermediary |
Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies
“Bad actor” disqualifications apply |
No investment limits for accredited investors
Non-accredited investors are subject to investment limits based on the greater of annual income and net worth |
Form C, including two years of financial statements that are certified, reviewed or audited, as required
Progress and annual reports |
12-month resale limitations | Yes |
Intrastate: Section 3(a)(11) | No federal limit (generally, individual state limits between $1 and $5 million) | Offerees must be in-state residents. | In-state residents “doing business” and incorporated in-state; excludes registered investment companies | Offerees and purchasers must be in-state residents | None | Securities must come to rest with in-state residents | No |
Intrastate: Rule 147 | No federal limit (generally, individual state limits between $1 and $5 million) | Offerees must be in-state residents. | In-state residents “doing business” and incorporated in-state; excludes registered investment companies | Offerees and purchasers must be in-state residents | None | Yes. Resales must be within state for six months | No |
Intrastate: Rule 147A | No federal limit (generally, individual state limits between $1 and $5 million) | Yes | In-state residents and “doing business” in-state; excludes registered investment companies | Purchasers must be in-state residents | None | Yes. Resales must be within state for six months | No |
The amendments will go into effect 60 days following publication in the Federal Register, apart from the extension of the temporary Regulation Crowdfunding provisions, which will be effective once published in the Federal Register.
For further information, contact Anthony Barone or John Byrne, Special Counsel, Office of Small Business Policy, or Steven G. Hearne, Senior Special Counsel, Office of Rulemaking, at (202) 551-3460, Division of Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at (202) 551-6999, Investment Adviser Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
Sources:
SEC Harmonizes and Improves “Patchwork” Exempt Offering Framework (sec.gov)
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